Question: You have been asked by a client to determine the maximum price he should be willing to pay to purchase an American Call option on

You have been asked by a client to determine the maximum price he should be willing to pay to purchase an American Call option on OF Corporations stock. The option has an exercise price of $25, and it expires in 2 years. The current price of OF Corporations stock is $22, the annual risk-free rate is 7 percent, and the estimated annual standard deviation of the stock is 5.76 percent. No dividends are expected to be declared over the next 2 years. The price can go up or down once a year. What is the maximum price your client should pay? Using replicating portfolio approach. (NOTE: u = exp[t] and d = 1/u).

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